Recommendations for Contractor Year-end Tax Planning

Now that the January rush to get self-assessments returns completed has passed, our focus for our Ltd company contractor clients is on year end taxation planning – noting that the tax year end for individuals is 5 April 2015.

Below we outline a few areas that you may wish to consider. We may have already discussed some of these areas, but others might be new or things that we need to revisit with you. In particular, in relation to the tax investigation fees protection, this is a service that we are rolling out to all of our clients for the first time.

1. Ensure you are claiming tax relief on all allowable expenses

As is usual, we will carefully review your bank statements to identify expenses that can be claimed against your income. However, it is important that you also review your personal bank statements, cash expenses and credit card expenses for any personally incurred expenses which are “wholly and exclusivley” incurred for business purposes. For example, mileage, professional subscriptions and accommodation costs which you may have paid for personally. But do always seek advice from us if you are unsure whether an expense is allowable.

This ensures you can plan how much more you can draw from the company and consider the tax implications associated with it – you do not need to take all company profits as a dividend. There is planning here around taking enough dividends that you need to finance your lifestyle, and in certain cases if you have not withdrawn all your available retained profits from your company, then so long as a dividend declaration has been made, and is supported with the necessary documentation and entries in the company’s underlying records, then dividend income will be included in your personal tax return (so that you are utilising your maximum basic rate band) and the cash would then be available to take out of the company when required.

It is also worth considering whether appointing another shareholder may be appropriate – however, seek our advice before doing so as we need to ensure that any “income splitting” is commercially viable for your business and is not seen to be tax avoidance. We can also ensure that it is carried out in the most tax efficient way.

3. Reviewing salaries of Directors

For small owner managed businesses, with the new “employment allowance” it should be the case that an annual salary of £10,000 is efficient as the small amount of employees National insurance due on this level of salary is lower than the corporation tax saving on this salary level. In many cases a higher salary may be recommended (for reasons of reducing IR35 risk and ensuring that sufficient is drawn out on a regular basis to support your lifestyle). We would also recommend that if you are currently paying private pension contributions from your personal name, that you consider moving this to paying from your Ltd company. The pension contributions will be allowable for corporation tax and you will not be using up your basic rate band with dividend payments that you are then going to pay into a pension scheme.

4. Financial products

In addition to pension advice, we are able to advise generally on financial products (due to holding the required licence from the Institute of Chartered Accountants in England & Wales (ICAEW), but we are not registered to provide specific advice on which products should be taken out. We are in the planning stages to determine whether we are going to go into financial services products and will keep you updated in this area.

5. Extracting company profits – Entrepreneurs’ relief

If you think that your company may not be required in the next few years, for example you are planning on retiring or taking a permanent role, you should start, sooner rather than later, to consider a tax planning opportunity enabling you to extract the company profits at a rate of 10% as opposed to dividend rates of 25% if a higher rate payer or 30.6% if you are an additional rate tax payer. The 10% capital gains tax rate is available by claiming “entreprenuers relief” and would be available should certain qualifying conditions be met – we can advise you on this area and can ensure that your plans are carried out in a logical and structured way so that you can claim this valuable relief.

Recent developments and latest news from MG Group

We are delighted to be in our 8th year of membership of the IPSE (The Association of Independent Professionals and the Self Employed) this was previously known as The Professional Contractors Group (PCG). We continue to adhere to the latest best practice for contractor clients, yet we are small enough to provide a personal and highly specialised service, which is something that the larger contractor accounting firms cannot provide. We are looking to expand our service offerings to include wealth management services, and this is an area that we are currently looking into with a view to offering this service very soon. However, one new service that we can tell you about now is our tax investigation fees protection service (see the next bullet point for information on this service).

1. Tax investigation fees protection

We are continuing to develop our services to you and for 2015-16 we are delighted to offer our fee protection services – which will mean that should you be unfortunate enough to be selected for an HMRC enquiry that the fee protection would mean that any costs associated with defending the enquiry will be covered by our protection service. We are delighted that we have also negotiated this to cover the costs of an IR35 enquiry. We will be sending out further details on this service, together with the costs; the service will commence from 1 April 2015 and run up to 31 March 2016.

2. Work place pensions – employer compliance

The law on workplace pensions has changed and we are now entering the time where Ltd company contractors will need to get ready for implementation of their pension scheme, or deciding on whether they wish to opt out of the service. This is a major change in pension’s legislation and is the biggest shake up in this area since “A Day” back in 2006.

We will be writing shortly to you with details of the changes to pensions together with the services we can provide to you and your business in this crucial area.

Should you have any questions in the meantime, please do not hesitate to contact your usual MG Group contact.

We would like to take this opportunity to thank you for being a valued client of our business and we want to ensure that we are living up to our values of “keeping our clients informed”. Please let us know if you have any questions or require any assistance and we will be delighted to assist you.